The Money Pit
By Paul Krugman
So this contractor is renovating your house.
Funny how he got the job: you checked the wrong box on a confusing form,
and the judge — a close friend of the contractor — ruled that you were stuck.
Anyway, though you told him that your priority was replacing your leaky roof,
he insists that first he wants to put in a luxurious powder room.
Back when he was trying to get your business, the contractor said that
he could put
in the powder room for only $10,000, though others insisted that estimate was way
too low. Now it turns out, sure enough, that it will cost at least $25,000. But he
claims that he can save enough money on other parts of the job to make up the
difference. And one of his employees has offered his personal assurance that the
roof won't be neglected — though he admits that in the end it's not his decision, and
his boss refuses to put anything in writing.
Last May, when George W. Bush was claiming that he planned only a trillion-dollar
tax cut — remember the routine with the dollar bills? — independent experts
estimated the actual 10-year budget cost of his tax plan at close to $2 trillion. They
also warned that under Mr. Bush's plan a hitherto obscure aspect of the tax code,
the alternative minimum tax, would become a major issue — and resolving that issue
would sharply increase the cost of the plan.
Sure enough, earlier this month the bipartisan Congressional Joint Tax
estimated that Mr. Bush's proposal would reduce revenues over the next decade by
$2.2 trillion. And the J.T.C. also produced some shocking estimates about the
alternative minimum tax.
Most people have never heard of this tax, which was supposed to prevent
wealthy from avoiding taxes but ends up mainly affecting upper- middle-income
families with lots of deductions. When the tax kicks in, it's infuriating; you've carefully
calculated everything, then you discover that you have to do another calculation, and
you end up owing a lot more. But right now this happens to only 1.5 percent of taxpayers.
The J.T.C. concluded, however, that under the Bush plan this number would rise to
one-third of taxpayers. Without question the law will be changed so that this doesn't
happen — but the fix will add at least $300 billion to the cost of the plan.
So the "trillion-dollar tax cut" has become $2.5 trillion and counting
— which means
that Mr. Bush can pay for initiatives like missile defense and prescription drug
coverage only by raiding Social Security and Medicare.
Last week Tommy Thompson, secretary of health and human services, tried
suspicions about such a raid by offering his personal assurance that the money
Medicare has been accumulating to care for the baby boomers will not be diverted
into other uses — even though Mr. Bush includes that money in his "contingency
fund." But Mr. Thompson admitted that it isn't really up to him — and the
administration's allies in the Senate blocked a measure that would have made Mr.
Thompson's promise binding. Somehow I'm not reassured.
The latest news is that Mr. Bush wants additional tax cuts this year to
economy; he has apparently just realized that cuts that will take 10 years to phase in
won't do anything to increase spending today. This will add hundreds of billions to
the budget cost of his plan. You might think that he would admit that this increases
the cost of his tax cut, and perhaps that he would offer to scale back those future tax
cuts. Not a chance: administration officials claim that tax cuts this year don't affect
their arithmetic because their budget is for 2002 through 2011, so what happens this
year doesn't count. I am not making this up.
The important point is that the estimated cost of the tax cut hasn't exploded
of new information; it has exploded because the original estimates were simply
dishonest. Mr. Bush knew from the start that he was misleading the public about the
budget impact of his proposals, just as he knows that he is misleading people now
about whose taxes will be cut and by how much. This contractor didn't make an
honest error; he deliberately deceived the homeowner. And as long as he keeps
getting away with it, he sees no reason to change the way he does business.